THE CAUSES OF THE ECONOMIC CRISIS phần 5 potx

The continual dis-placement of the silver standard by the gold standard and theshift in some countries from credit money to gold added to thedemand for monetary gold in the years before

However, it should certainly not be forgotten that under the

“pure” gold standard governmental measures may also have a nificant influence on the formation of the value of gold In thefirst place, governmental actions determine whether to adopt thegold standard, abandon it, or return to it However, the effect ofthese governmental actions, which we need not consider any fur-ther here, is conceived as very different from those described bythe various “state theories of money”—theories which, now atlong last, are generally recognized as absurd The continual dis-placement of the silver standard by the gold standard and theshift in some countries from credit money to gold added to thedemand for monetary gold in the years before the World War[1914–1918] War measures resulted in monetary policies thatled the belligerent nations, as well as some neutral states, torelease large parts of their gold reserves, thus releasing more goldfor world markets Every political act in this area, insofar as itaffects the demand for, and the quantity of, gold as money, repre-sents a “manipulation” of the gold standard and affects allcountries adhering to the gold standard

sig-Just as the “pure” gold, the gold exchange and the flexible dards do not differ in principle, but only in the degree to whichmoney substitutes are actually used in circulation, so is there nobasic difference in their susceptibility to manipulation The

stan-“pure” gold standard is subject to the influence of monetarymeasures—on the one hand, insofar as monetary policy mayaffect the acceptance or rejection of the gold standard in a polit-ical area and, on the other hand, insofar as monetary policy, whilestill clinging to the gold standard in principle, may bring aboutchanges in the demand for gold through an increase or decrease

in actual gold circulation or by changes in reserve requirementsfor banknotes and checking accounts The influence of monetarypolicy on the formation of the value [i.e., the purchasing power]

of gold also extends just that far and no farther under the goldexchange and flexible standards Here again, governments andthose agencies responsible for monetary policy can influence theformation of the value of gold by changing the course of mone-tary policy The extent of this influence depends on how large the

increase or decrease in the demand for gold is nationally, in tion to the total world demand for gold

rela-If advocates of the old “pure” gold standard spoke of the pendence of the value of gold from governmental influences, theymeant that once the gold standard had been adopted everywhere(and gold standard advocates of the last three decades of the nine-teenth century had not the slightest doubt that this would sooncome to pass, for the gold standard had already been almost uni-versally accepted) no further political action would affect theformation of monetary value This would be equally true for boththe gold exchange and flexible standards It would by no meansdisturb the logical assumptions of the perceptive “pure” gold stan-dard advocate to say that the value of gold would be considerablyaffected by a change in United States Federal Reserve Board pol-icy, such as the resumption of the circulation of gold or theretention of larger gold reserves in European countries In thissense, all monetary standards may be “manipulated” under today’seconomic conditions The advantage of the gold standard—whether “pure” or “gold exchange”—is due solely to the fact that,

inde-if once generally adopted in a definite form, and adhered to, it is

no longer subject to specific political interferences

War and postwar actions, with respect to monetary policy,have radically changed the monetary situation throughout theentire world One by one, individual countries are now [1928]reverting to a gold basis and it is likely that this process willsoon be completed Now, this leads to a second problem: Shouldthe exchange standard, which generally prevails today, beretained? Or should a return be made once more to the actualuse of gold in moderate-sized transactions as before under the

“pure” gold standard? Also, if it is decided to remain on theexchange standard, should reserves actually be maintained ingold? And at what height? Or could individual countries be sat-isfied with reserves of foreign exchange payable in gold?(Obviously, the flexible standard cannot become entirely univer-sal At least one country must continue to invest its reserves inreal gold, even if it does not use gold in actual circulation.) Only

if the state of affairs prevailing at a given instant in every single

area is maintained and, also, only if matters are left just as theyare, including of course the ratio of bank reserves, can it be saidthat the gold standard cannot be manipulated in the mannerdescribed above If these problems are dealt with in such a way

as to change markedly the demand for gold for monetary poses, then the purchasing power of gold must undergocorresponding changes

pur-To repeat for the sake of clarity, this represents no essentialdisagreement with the advocates of the gold standard as to whatthey considered its special superiority Changes in the monetarysystem of any large and wealthy land will necessarily influencesubstantially the creation of monetary value Once these changeshave been carried out and have worked their effect on the pur-chasing power of gold, the value of money will necessarily beaffected again by a return to the previous monetary system.However, this detracts in no way from the truth of the statementthat the creation of value under the gold standard is independent

of politics, so long as no essential changes are made in its ture, nor in the size of the area where it prevails

struc-2 CHANGES INPURCHASINGPOWER OFGOLD

Irving Fisher, as well as many others, criticize the gold dard because the purchasing power of gold has declinedconsiderably since 1896, and especially since 1914 In order toavoid misunderstanding, it should be pointed out that this drop

stan-in the purchasstan-ing power of gold must be traced back to monetarypolicy—monetary policy which fostered the reduction in thepurchasing power of gold through measures adopted between

1896 and 1914, to “economize” gold and, since 1914, through therejection of gold as the basis for money in many countries If oth-ers denounce the gold standard because the imminent return tothe actual use of gold in circulation and the strengthening of goldreserves in countries on the exchange standard would bringabout an increase in the purchasing power of gold, then itbecomes obvious that we are dealing with the consequences ofpolitical changes in monetary policy which transform the struc-ture of the gold standard

The purchasing power of gold is not “stable.” It should bepointed out that there is no such thing as “stable” purchasingpower, and never can be The concept of “stable value” is vagueand indistinct Strictly speaking, only an economy in the finalstate of rest—where all prices remain unchanged—could have amoney with fixed purchasing power However, it is a fact which

no one can dispute that the gold standard, once generallyadopted and adhered to without changes, makes the formation ofthe purchasing power of gold independent of the operations ofshifting political efforts

As gold is obtained only from a few sources, which sooner orlater will be exhausted, the fear is repeatedly expressed that theremay someday be a scarcity of gold and, as a consequence, a con-tinuing decline in commodity prices Such fears becameespecially great in the late 1870s and the 1880s Then they qui-eted down Only in recent years have they been revived again.Calculations are made indicating that the placers and mines cur-rently being worked will be exhausted within the foreseeablefuture No prospects are seen that any new rich sources of goldwill be opened up Should the demand for money increase in thefuture, to the same extent as it has in the recent past, then a gen-eral price drop appears inevitable, if we remain on the goldstandard.12

Now one must be very cautious with forecasts of this kind Ahalf century ago, Eduard Suess, the geologist, claimed—and hesought to establish this scientifically—that an unavoidabledecline in gold production should be expected.13 Facts very soonproved him wrong And it may be that those who express similarideas today will also be refuted just as quickly and just as thor-oughly Still we must agree that they are right in the final analysis,that prices are tending to fall [1928] and that all the social conse-quences of an increase in purchasing power are making their

12Gustav Cassell, Währungsstabilisierung als Weltproblem (Leipzig,

1928), p 12

13 [Eduard Suess (1831–1914) published a study in German (1877) on

“The Future of Gold.”— Ed.]

appearance What may be ventured, given the circumstances, inorder to change the economic pessimism, will be discussed at theend of the second part of this study

IV.

“MEASURING” CHANGES IN THE PURCHASING

1 IMAGINARYCONSTRUCTIONSAll proposals to replace the commodity money, gold, with amoney thought to be better, because it is more “stable” in value,are based on the vague idea that changes in purchasing powercan somehow be measured Only by starting from such anassumption is it possible to conceive of a monetary unit withunchanging purchasing power as the ideal and to consider seek-ing ways to reach this goal These proposals, vague and basicallycontradictory, are derived from the old, long since exploded,objective theory of value Yet they are not even completely con-sistent with that theory They now appear very much out of place

in the company of modern, subjective economics

The prestige which they still enjoy can be explained only bythe fact that, until very recently, studies in subjective economicshave been restricted to the theory of direct exchange (barter).Only lately have such studies been expanded to include also thetheory of intermediate (indirect) exchange, i.e., the theory of agenerally accepted medium of exchange (monetary theory) andthe theory of fiduciary media (banking theory) with all their rel-evant problems.14It is certainly high time to expose conclusivelythe errors and defects of the basic concept that purchasing powercan be measured

14[The Theory of Money and Credit, 1953, pp 116ff.; 1980, pp 138ff.—

Ed.]

Exchange ratios on the market are constantly subject

to change If we imagine a market where no generally acceptedmedium of exchange, i.e., no money, is used, it is easy to recog-nize how nonsensical the idea is of trying to measure thechanges taking place in exchange ratios It is only if we resort tothe fiction of completely stationary exchange ratios among allcommodities, other than money, and then compare these othercommodities with money, that we can envisage exchange rela-tionships between money and each of the other individualexchange commodities changing uniformly Only then can wespeak of a uniform increase or decrease in the monetary price ofall commodities and of a uniform rise or fall of the “price level.”Still, we must not forget that this concept is pure fiction, whatVaihinger termed an “as if.”15 It is a deliberate imaginary con-struction, indispensable for scientific thinking

Perhaps the necessity for this imaginary construction willbecome somewhat more clear if we express it, not in terms of theobjective exchange value of the market, but in terms of the sub-jective exchange valuation of the acting individual To do that, wemust imagine an unchanging man with never-changing values.Such an individual could determine, from his never-changingscale of values, the purchasing power of money He could say pre-cisely how the quantity of money, which he must spend to attain

a certain amount of satisfaction, had changed Nevertheless, theidea of a definite structure of prices, a “price level,” which is raised

or lowered uniformly, is just as fictitious as this However, itenables us to recognize clearly that every change in the exchangeratio between a commodity, on the one side, and money, on theother, must necessarily lead to shifts in the disposition of wealthand income among acting individuals Thus, each such changeacts as a dynamic agent also In view of this situation, therefore,

it is not permissible to make such an assumption as a uniformlychanging “level” of prices

15Hans Vaihinger (1852–1933), author of The Philosophy of As If

(German, 1911; English translation, 1924).

This imaginary construction is necessary, however, to explainthat the exchange ratios of the various economic goods mayundergo a change from the side of one individual commodity.

This fictional concept is the ceteris paribus of the theory of

exchange relationships It is just as fictitious and, at the same

time, just as indispensable as any ceteris paribus If extraordinary

circumstances lead to exceptionally large and hence conspicuouschanges in exchange ratios, data on market phenomena may help

to facilitate sound thinking on these problems However, theneven more than ever, if we want to see the situation at all clearly,

we must resort to the imaginary construction necessary for anunderstanding of our theory

The expressions, “inflation” and “deflation,” scarcely known inGerman economic literature several years ago, are in daily usetoday In spite of their inexactness, they are undoubtedly suit-able for general use in public discussions of economic andpolitical problems.16But in order to understand them precisely,one must elaborate with rigid logic that fictional concept [theimaginary construction of completely stationary exchange ratiosamong all commodities other than money], the falsity of which

commodi-or adopted in the field of monetary and banking policy Even inthese cases, however, we can never succeed in constructing a fic-tional representation that coincides with the situation whichactually appears on the market The imaginary construction

16[The Theory of Money and Credit, 1953, pp 239ff; 1980, pp 271ff.—

Ed.]

makes it easier to understand reality, but we must remain scious of the distinction between fiction and reality.17

con-17 [At this point, in a footnote, Professor Mises commented on a versy he had had with a student over terminology He again recommended,

contro-as he had in 1923 (see above, p 1, n 1), continuing to use Menger’s terms which enjoyed general acceptance The simpler English terms, which Mises

developed and adopted later—notably in Human Action (3rd rev ed., 1966,

pp 419–24; 1998, pp 416–21), where he describes “goods-induced” or

“cash-induced” changes in the value of the monetary unit—are used in this translation For those who may be interested in this controversy, the origi- nal footnote follows:

Carl Menger referred to the nature and extent of the influence exerted on money/goods exchange ratios [prices] by changes from the money side as

the problem of the “internal” exchange value (innere Tauschwert) of money

[translated in this volume as “cash-induced changes”] He referred to the variations in the purchasing power of the monetary unit due to other

causes as changes in the “external” exchange value (aussere Tauschwert) of

money [translated as “goods-induced changes”] I have criticized both expressions as being rather unfortunate—because of possible confusion with the terms “extrinsic and intrinsic value” as used in Roman canon doc- trine, and by English authors of the seventeenth and eighteenth centuries.

(See the German editions of my book on The Theory of Money and Credit,

1912, p 132; 1924, p 104) Nevertheless, this terminology has attained entific acceptance through its use by Menger and it will be used in this study when appropriate.

sci-There is no need to discuss an expression which describes a useful and indispensable idea It is the concept itself, not the term used to describe it, which is important Serious mischief is done if an author chooses a new term unnecessarily to express a concept for which a name already exists.

My student, Gottfried Haberler, has criticized me severely for taking this

position, reproaching me for being a slave to semantics (See Haberler, Der Sinn der Indexzahlen [Tübingen, 1927], pp 109ff.) However, in his relevant

remarks on this problem, Haberler says nothing more than I have He too distinguishes between price changes arising on the goods and money sides Beginners should seek to expand knowledge and avoid spending time on useless terminological disputes As Haberler points out, it would obviously

be wasted effort to “seek internal and external exchange values of money in the real world.” Ideas do not belong to the “real world” at all, but to the world of thought and knowledge.

It is even more astonishing that Haberler finds my critique of attempts to measure the value of the monetary unit “inexpedient,” especially as his analysis rests entirely on mine.—Ed.]

2 INDEXNUMBERSAttempts have been made to measure changes in the purchas-ing power of money by using data derived from changes in themoney prices of individual economic goods These attempts rest

on the theory that, in a carefully selected index of a large number,

or of all consumers’ goods, influences from the commodity sideaffecting commodity prices cancel each other out Thus, so thetheory goes, the direction and extent of the influence on prices offactors arising on the money side may be discovered from such

an index Essentially, therefore, by computing an arithmeticalmean, this method seeks to convert the price changes emergingamong the various consumers’ goods into a figure which maythen be considered an index to the change in the value of money

In this discussion, we shall disregard the practical difficultieswhich arise in assembling the price quotations necessary to serve

as the basis for such calculations and restrict ourselves to menting on the fundamental usefulness of this method for thesolution of our problem

com-First of all it should be noted that there are various cal means Which one should be selected? That is an oldquestion Reasons may be advanced for, and objections raisedagainst, each From our point of view, the only important thing to

arithmeti-be learned in such a debate is that the question cannot arithmeti-be settledconclusively so that everyone will accept any single answer as

“right.”

The other fundamental question concerns the relativeimportance of the various consumer goods In developing theindex, if the price of each and every commodity is considered ashaving the same weight, a 50 percent increase in the price ofbread, for instance, would be offset in calculating the arithmeti-cal average by a drop of one-half in the price of diamonds Theindex would then indicate no change in purchasing power, or

“price level.” As such a conclusion is obviously preposterous,attempts are made in fabricating index numbers, to use theprices of various commodities according to their relative impor-tance Prices should be included in the calculations according to

the coefficient of their importance The result is then known as

a “weighted” average

This brings us to the second arbitrary decision necessary fordeveloping such an index What is “importance”? Several differ-ent approaches have been tried and arguments pro and con eachhave been raised Obviously, a clear-cut, all-round satisfactorysolution to the problem cannot be found Special attention hasbeen given the difficulty arising from the fact that, if the usualmethod is followed, the very circumstances involved in deter-mining “importance” are constantly in flux; thus the coefficient

of importance itself is also continuously changing

As soon as one starts to take into consideration the “importance”

of the various goods, one forsakes the assumption of objectiveexchange value—which often leads to nonsensical conclusions aspointed out above—and enters the area of subjective values Sincethere is no generally recognized immutable “importance” to variousgoods, since “subjective” value has meaning only from the point ofview of the acting individual, further reflection leads eventually tothe subjective method already discussed—namely the inexcusablefiction of a never-changing man with never-changing values Toavoid arriving at this conclusion, which is also obviously absurd,one remains indecisively on the fence, midway between two equallynonsensical methods—on the one side the un-weighted averageand on the other the fiction of a never-changing individual withnever-changing values Yet one believes he has discovered some-thing useful Truth is not the halfway point between two untruths.The fact that each of these two methods, if followed to its logicalconclusion, is shown to be preposterous, in no way proves that acombination of the two is the correct one

All index computations pass quickly over these unanswerableobjections The calculations are made with whatever coefficients

of importance are selected However, we have established thateven the problem of determining “importance” is not capable ofsolution, with certainty, in such a way as to be recognized byeveryone as “right.”

Thus the idea that changes in the purchasing power of moneymay be measured is scientifically untenable This will come as no

surprise to anyone who is acquainted with the fundamental lems of modern subjectivistic catallactics and has recognized thesignificance of recent studies with respect to the measurement ofvalue18and the meaning of monetary calculation.19

prob-One can certainly try to devise index numbers Nowadaysnothing is more popular among statisticians than this.Nevertheless, all these computations rest on a shaky foundation.Disregarding entirely the difficulties which, from time to time,even thwart agreement as to the commodities whose prices willform the basis of these calculations, these computations are arbi-trary in two ways—first, with respect to the arithmetical meanchosen and, secondly, with respect to the coefficient of impor-tance selected There is no way to characterize one of the manypossible methods as the only “correct” one and the others as

“false.” Each is equally legitimate or illegitimate None is ically meaningful

scientif-It is small consolation to point out that the results of the ous methods do not differ substantially from one another Even ifthat is the case, it cannot in the least affect the conclusions wemust draw from the observations we have made The fact thatpeople can conceive of such a scheme at all, that they are notmore critical, may be explained only by the eventuality of thegreat inflations, especially the greatest and most recent one Any index method is good enough to make a rough statementabout the extremely severe depreciation of the value of a mone-tary unit, such as that wrought in the German inflation There,the index served an instructional task, enlightening a people whowere inclined to the “State Theory of Money” idea Nevertheless,

vari-a method thvari-at helps to open the eyes of the people is not sarily either scientifically correct or applicable in actual practice

neces-18[See The Theory of Money and Credit, 1953, pp 38ff.; 1980, pp 51ff.—

Ed.]

19[See Socialism (New Haven, Conn.: Yale University Press, 1951), pp.

121ff and (Indianapolis, Ind.: Liberty Fund, 1981), pp 104.—Ed.]